Case Notes: Of bad faith and duties to defend, investigate and indemnify – Demetre vs. Indiana Insurance Co., COA Published, Jan. 30, 2015

Bad faith synonyms in a non-legal context should help provide context for this delict.

Bad faith synonyms in a non-legal context should help provide context for this delict. Screen capture from Thesaurus.com.

Is a reservation of rights and providing the insured counsel, a defense to statutory and contractual bad faith claims?  The Court of Appeals basically said – nope, it ain’t.  The following opinion by Judge Thompson provides not only a tight and succinct analysis of bad faith law, with a little bit of history Justice Leibson’s dissent in Federal Kemper, but one of the best explanations I have read on how emotional damages in the Osborne v. Keeney, 399 S.W.3d 1 (Ky. 2012) decision fit in to all of this.

The COA referenced the crux of Indiana’s defense – “Indiana Insurance argues it cannot be liable as a matter of law under any theories advanced because it provided defense counsel to Demetre and indemnification in compliance with the insurance policy provisions. To the extent it relies solely on its satisfaction of the express policy provisions, Indiana Insurance’s argument misses the mark. This is not a breach of contract action but is premised on three theories of bad faith, two based on statutory law and one on common law.”

Please look closely at the bad faith analysis and how Indiana Insurance Company treated its insured poorly by its conduct upon filing the claim by Demetre and its lack of investigation into the claim while hiding under a reservation of rights.  Briefly, “We have previously held an insurer cannot shield itself from its own bad faith actions by retaining legal counsel for its insured. “[I]t remains ultimately responsible for its own non-delegable statutory duty to properly investigate claims -19-and adjust them in harmony with the terms and conditions of its policy.” Hamilton Mut. Ins. Co. of Cincinnati v. Buttery, 220 S.W.3d 287, 294 (Ky.App. 2007). It was the conduct of Indiana Insurance, not the adequacy of Schenkel’s representation, that evidenced bad faith.”

However, I wish to highlight for you the emotional damages analysis of Osborne v. Keeney, 399 S.W.3d 1 (Ky. 2012) in the context of this decision.  No experts needed if the mental anguish and anxiety are damages from the cause of action, but experts ARE needed if the mental anguish and anxiety is an element of proof in the cause of action.  That makes a lot of sense to me.

The question is whether the heightened proof requirements in Osborne extends to bad faith claims under the Unfair Claims Settlement Practices Act where damages for mental anguish and anxiety have been traditionally permitted without an impact and without expert testimony. As noted in FB Ins. Co. v. Jones, 864 S.W.2d 926, 929 (Ky.App. 1993), the Unfair Claims Settlement Practices Act prohibits behavior that is egregious. Consequently, damages are available as permitted by KRS 446.070 which states: “A person injured by the violation of any statute may recover from the offender such damages as he sustained by reason of the violation, although a penalty or forfeiture is imposed for such violation.” In FB Insurance, the Court held those damages include damages for anxiety and mental anguish in claims pursuant to KRS 304.12-230. FB Insurance, 864 S.W.2d at 929.

In Motorists Mutual Ins. Co. v. Glass, 996 S.W.2d 437, 454 (Ky. 1997), the Court not only confirmed that damages for anxiety and mental anguish are recoverable in statutory bad faith claims, but it also set forth the proof required: 1 Indiana Insurance cites unpublished federal decisions applying Osborne in contexts other than statutory bad faith claims. We are not bound by those decisions predicting how Kentucky appellate courts would rule and do not find them persuasive on a factual basis. -26-“[E]ntitlement to such damages requires either direct or circumstantial evidence from which the jury could infer that anxiety or mental anguish in fact occurred.” Id.

Although written in the context of a violation of the Kentucky Civil Rights Act, our Supreme Court has distinguished between statutory actions where emotional distress damages are recoverable and the elements of the tort of IIED which requires the distress be severe. In Childers Oil Co., Inc. v. Adkins, 256 S.W.3d 19, 28 (Ky. 2008), the Court expressly rejected any requirement that the plaintiff prove her emotional distress was severe. It pointed out the action was not filed as an IIED claim but was an action under the Kentucky Civil Rights Act. It held the plaintiff’s testimony alone supported an award for anxiety and mental anguish and, because such damages were permissible, the question was simply whether the damages were excessive. Id.

Osborne did not alter the law cited. A claim brought under the Unfair Claims Settlement Practices Act is not a NIED or an IIED claim; it is a claim under the Act for compensatory damages, which include damages for emotional distress. In other words, emotional pain and suffering, stress, worry, anxiety or mental anguish are not elements of the cause of action but are consequences of the insurer’s violation of the Act for which the insured is entitled to be compensated.

THE INDIANA INSURANCE COMPANY VS. DEMETRE (JAMES)
OPINION AFFIRMING
THOMPSON (PRESIDING JUDGE) COMBS (CONCURS) AND STUMBO (CONCURS)
2013-CA-000338-MR TO BE PUBLISHED

THOMPSON, JUDGE: Indiana Insurance Company appeals from a judgment entered following a jury verdict in favor of its insured, James Demetre. The jury found Indiana Insurance violated Kentucky’s Unfair Claims Settlement Practices Act and Kentucky’s Consumer Protection Act and breached its contract by failing to perform as required by the contract, breaching its fiduciary duties owed Demetre or violating the implied covenant of good faith and fair dealing in the insurance contract. The jury awarded Demetre $925,000 for emotional pain and suffering, stress, worry, anxiety or mental anguish and $2.5 million in punitive damages. After entry of the judgment, Demetre filed a motion for attorney fees and expenses and expert expenses and costs under the Consumer Protection Act. The trial court denied attorney fees if the judgment is affirmed on appeal in its entirety. Although the trial court’s order provided for attorney fees in the event the judgment is reversed in part, because we are affirming the judgment in its entirety, we need not reiterate that portion of the trial court’s order.

Indiana Insurance presents the following arguments: (1) the trial court erred in not granting Indiana Insurance’s motion for directed verdict and motion for judgment notwithstanding the verdict (JNOV) on Demetre’s claims for breach of contract and violations of the Unfair Claims Settlement Practices Act and the Consumer Protection Act; (2) the evidence of Demetre’s emotional distress was insufficient to support an award; (3) the jury instructions were erroneous because Demetre was permitted to recover tort damages for breach of contract and did not properly instruct the jury on the proper standard for an award of damages for emotional distress damages; (4) the trial court erred when it excluded the testimony of two witnesses because they were not timely disclosed to Demetre’s counsel; (5) the punitive damages award was excessive; and (6) the trial court’s award of contingent, unliquidated attorney fees was error.

 

* * *

After two years of battling the coverage issue with Indiana Insurance, on November 14, 2011, Demtere filed a cross-claim against Indiana Insurance. He alleged violation of the Unfair Claims Settlement Practices Act and the Consumer Protection Act as well as breach of contract based on implied covenants of good faith and fair dealing. Meanwhile, Demetre’s newly appointed counsel began to investigate the merits of the Harris family’s claims. In addition to attending depositions, he arranged independent medical exams and inspections of the Harris home by experts. As did prior counsel, defense counsel concluded the Harris family’s claims had little merit and nominal value. More than three years after receiving notice of the Harris family’s claims and more than two years after the Harris family’s litigation commenced, on December 20, 2011, Indiana Insurance settled with the Harris family for $165,000. With the coverage issue resolved by the settlement, Indiana Insurance’s pending cross-claim against Demetre for declaratory judgment was dismissed on February 17, 2012.

[As noted above, the cross claim proceeded to trial, and Indiana Insurance got hit, and got hit hard for their handling of the claim. Specifically, the jury awarded Demetre $925,000 for emotional pain and suffering, stress, worry, anxiety or mental anguish and $2.5 million in punitive damages.]

* * *

Indiana Insurance argues [on appeal] it cannot be liable as a matter of law under any theories advanced because it provided defense counsel to Demetre and indemnification in compliance with the insurance policy provisions. To the extent it relies solely on its satisfaction of the express policy provisions, Indiana Insurance’s argument misses the mark. This is not a breach of contract action but is premised on three theories of bad faith, two based on statutory law and one on common law.

* * *

Demetre had three possible theories upon which to base his bad faith claim. The question is whether he produced sufficient evidence under any, or all, of these theories to submit the case to the jury. We examine the evidence keeping in mind “[i]nadvertence, sloppiness, or tardiness will not suffice; instead, the element of malice or flagrant malfeasance must be shown.” United Services Auto. Ass’n. v. Bult, 183 S.W.3d 181, 186 (Ky.App. 2003).

** *

As an insured, Demetre made a claim for the benefits purchased under the Indiana Insurance policy when he notified Indiana Insurance of the Harris family’s claims. As explained in Knotts v. Zurich Ins. Co., 197 S.W.3d 512, 530 (Ky. 2006), a claim includes a demand for benefits under an insurance policy. -15-A more legally persuasive and factually sustainable argument is that because Indiana Insurance provided a defense to Demetre and ultimate indemnification, it cannot be liable for bad faith. To put the issue succinctly, can an insurer absolve itself from liability for bad faith by defending under a reservation of rights and ultimately providing coverage for its insured in litigation filed by a third party? We decline to adopt a blanket rule shielding an insurer from bad faith in such circumstances and conclude the issue is better approached on a case-by-case basis. We begin by noting this situation creates a judicial paradox. If there is any allegation in a complaint against an insured potentially covered under the insured’s policy of insurance, the insurer has a duty to defend. However, through a reservation of rights, an insurer may offer to defend while contesting coverage. Simpsonville Wrecker Service, Inc. v. Empire Fire and Marine Ins. Co., 793 S.W.2d 825, 830 (Ky.App. 1989). The paradox is the insurance company is asserting its right to reserve its defense of no coverage while complying with its duty to defend its insured.

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However, the Court was also not inclined to preclude a bad faith action where the bad faith threshold is met. It stated: Some may argue that the insurer, by notifying its insured that it is defending under a reservation of rights and filing a declaratory judgment action, is automatically absolved of bad faith. We do not so hold. Clearly, one can envision factual situations where an insurer could abuse its legal prerogative in requesting a court to -17-determine coverage issues. Those may well be addressed through a motion under Civil Rule 11 or, in certain circumstances, an action for bad faith. Guaranty Nat., 953 S.W.2d at 949.

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